Canexus Announces 2016 Second Quarter Results

CALGARY, AB--(Marketwired - August 11, 2016) - Canexus Corporation (TSX: CUS) (the "Corporation" or "Canexus") today announced its financial results for the second quarter ended June 30, 2016.

Highlights

Cash Operating Profit ("COP") was $22.6M for the second quarter of 2016 including severance costs of $2.1M related to a G&A cost initiative as part of the Business Improvement Program ("BIP") and expenses related to the terminated Superior Transaction (as defined below) of $1M (Q1/16 - $26.5M including expenses related to the terminated Superior Transaction of $4.5M and certain litigation costs of $0.1M; Q2/15 - $27.6M). Results reflect continued strong performance from the North American Sodium Chlorate and South America business units.

Canexus' outlook for 2016 Cash Operating Profit remains at $100-$110M excluding expenses related to the terminated Superior Transaction of $5.5M, severance costs related to BIP initiatives of $2.2M and certain litigation costs of $0.1M incurred as of June 30, 2016.

The Corporation continues to execute its go-forward strategy to improve financial flexibility and reduce debt by $100M by the end of 2018:

As part of the next phase of its BIP, Canexus implemented additional G&A cost reductions which, in conjunction with other 2016 initiatives, are anticipated to generate $6 - $8M of COP improvements annually and contribute to our target of 5% compound COP annual growth rate over the next three years.

Canexus is committed to managing maintenance capital to average $25M per year over three years.

The Corporation has suspended its cash dividend.

Canexus has received commitments from a syndicate of six banks for a $425 million total credit facility, including a $350 million extendible revolving credit facility (amending the existing extendible revolving credit facility that was set to mature on June 30, 2017) and a $75 million bridge loan that will expire nine months after closing and replaces the current non-revolving term facility. This credit facility is in the final legal stages of completion and is expected to be fully executed before August 31, 2016. The amended extendible revolving credit facility will have a maturity date of August 31, 2018.

Production at the North Vancouver chlor-alkali plant is now ramping up as the rebuilt chlorine compressor undergoes testing and commissioning. Once fully operational, the plant is expected to be restored to full production capability. Canexus recovered $2.7M in interim insurance proceeds related to the compressor outage in the second quarter.

On June 30, 2016, the Arrangement Agreement dated October 5, 2015 between Superior Plus Corp. ("Superior") and Canexus ("Arrangement Agreement") was terminated by Canexus after Superior failed to obtain Federal Trade Commission ("FTC") approval of the transaction contemplated by the Arrangement Agreement (the "Superior Transaction") and Superior declined to provide certain reasonable protections necessary for Canexus to agree to extend the outside date of the Arrangement Agreement beyond June 29, 2016.

Financial Results

Cash Operating Profit was $22.6M for the second quarter of 2016 including severance costs of $2.1M related to a G&A cost initiative as part of the Business Improvement Program and expenses related to the terminated Superior Transaction of $1M (Q1/16 - $26.5M including expenses related to the terminated Superior Transaction of $4.5M and certain litigation costs of $0.1M; Q2/15 - $27.6M).

Our Q2/16 results reflect strong sales revenues from our North American Sodium Chlorate business unit supported by solid demand and ongoing weakness in the Canadian dollar relative to the US dollar. Growing chlorine demand and solid caustic soda market demand supported higher realized prices in those markets over the same period last year. Brazil continues to generate strong COP based on the realized margin from our fixed US dollar margin contract with our primary customer.

These positive results were partially offset by continued weak hydrochloric acid ("HCl") demand due to reduced oil and gas hydraulic fracturing activity. Interim insurance proceeds related to the chlorine compressor outage of $2.7M were received in the second quarter.

Operational Results

North American Sodium Chlorate

Canexus' North American Sodium Chlorate business continued to generate solid results, as Q2/16 COP of $17.9 million (Q1/16 - $22.4 million; Q2/15 - $19.1 million) was achieved. We experienced higher realized prices from US volumes compared to the same quarter in the previous year, as a result of the weakness of the Canadian dollar relative to the US dollar, with approximately two-thirds of our sales volume exported to the United States. Quarterly business unit sales volumes declined approximately 4% over the same quarter in the previous year due primarily to a higher number of planned customer mill outages and flooding in the southeastern United States. North American sodium chlorate industry operating rates are expected to remain near 92% for the balance of the year.

North American Chlor-alkali

Canexus' North American chlor-alkali business had nil Cash Operating Profit in the quarter (Q1/16 - $2.4 million; Q2/15 - $1.3 million). We realized higher caustic soda prices relative to the same period last year. Chlorine sales volumes were up over the same quarter in the previous year, reflecting North American chlorine demand growth. Negatively impacting COP was the approximate 41% decline in HCl sales volumes compared to the same period last year due to the slowdown in oil and gas hydraulic fracturing activity in Canada and the United States. As well, customer mill outages and a change in the customer portfolio contributed to Canexus' sales volumes declining by approximately 9% over the same period last year.

During the second quarter, the North Vancouver plant operated at reduced capacity due to a compressor outage caused by mechanical failure in Q3/15. The rebuilt compressor has now been installed and is in the process of testing and commissioning. Once fully operational, the plant is expected to be restored to full production capability. Given the weakness in the HCl market, the overall impact of the compressor outage to the business was less significant than under normal market conditions. The Corporation continues to proceed with a claim under its insurance policies after receiving an interim payment in the second quarter. With increased capacity and given the successful completion of last year's caustic modernization and anode replacement projects, Canexus is well positioned to profit from any future recovery in the HCl market.

South America

Canexus' Brazil operations generated COP of $7.2 million in the quarter (Q1/16 - $7.7 million; Q2/15 - $7.4 million). Brazil's operations continue to be highly stable with our primary customer running at high production rates, resulting in strong demand for our products which are sold under a long-term, cost plus, fixed US dollar margin contract. This business is also experiencing a positive uplift from the ongoing weakness of the Canadian dollar and the Brazilian Real as compared to the US dollar, as well as lower purchased product and fixed costs.

Focus 2018: Improve Operating Performance and Financial Flexibility

On July 5, 2016, Canexus announced its plan to focus on the operational excellence of its core assets to improve efficiency and maximize margins through its BIP to achieve 2016 COP of $100 - $110M excluding severance costs and expenses related to the terminated Superior Transaction. As part of its go-forward strategy, Canexus implemented the next phase of its BIP resulting in additional G&A cost reductions. Total BIP initiatives identified for 2016 are anticipated to contribute $3 - $5M to COP with annualized improvements of $6 - $8M. BIP initiatives will contribute to the Corporation's target of 5% compound annual growth rate for COP over the next three years.

In addition, Canexus' primary strategic focus is to lower its debt position, targeting a $100M reduction by the end of 2018. The Company expects to reduce its total senior debt to earnings ratio to 2.5x times over the same time period. The Company will direct free cash flow to debt reduction. Maintenance capital is expected to average $25 million/year. In order to further enhance its financial strength and flexibility, the Corporation has suspended the cash dividend.

Amendment and Extension of Credit Facility

The Corporation has commitments from a syndicate of six banks for a $425 million total credit facility including a $350 million extendible revolving credit facility (the "Facility") amending the existing extendible revolving credit facility that was set to mature on June 30, 2017 and a $75 million bridge loan (the "Bridge Loan") that will expire nine months after closing and replaces the current non-revolving term facility. The Facility and the Bridge Loan are in the final legal stages of completion and are expected to be fully executed before August 31, 2016 and the Facility will have a maturity date of August 31, 2018. Following execution, amounts owing under the Facility will no longer be current in nature.

Management believes net cash generated from operating activities will be sufficient for the Corporation to meet future obligations and commitments that arise in the normal course of its business activities, including ongoing maintenance capital expenditures and normal course financial commitments. The Facility will allow for a relaxed senior debt leverage ratio while the Bridge Loan is outstanding, providing sufficient liquidity to execute the corporate strategy.

Termination of Superior Transaction and Reverse Termination Fee

The Arrangement Agreement was terminated by Canexus after Superior failed to obtain FTC approval of the Superior Transaction and Superior declined to provide certain reasonable protections necessary for Canexus to agree to extend the outside date of the Arrangement Agreement beyond June 29, 2016. These protections were necessary for Canexus, in good faith, to incur the significant additional cost and risks associated with protracted, expensive and highly uncertain litigation against the FTC in Washington, DC.

Under the terms of the Arrangement Agreement, a reverse termination fee of $25M is payable by Superior to Canexus. On July 5, 2016, Canexus initiated legal proceedings against Superior to recover the $25M reverse termination fee. Superior has counterclaimed, claiming that Canexus was in breach of certain provisions of the Arrangement Agreement. Canexus believes that Superior's counterclaim is without merit and expects a positive judicial outcome.

As the matter of the claim and counterclaim is now before the Court of Queen's Bench of Alberta, Canexus will have no further statement to make unless and until a decision is reached by the court or a settlement is reached with Superior.

Financial Results

Highlights

Three Months Ended June 30

Six Months Ended June 30

2016

2015

2016

2015

Average Canadian to US dollar exchange

(1 CAD to USD)

0.7693

0.8078

0.7443

0.8193

Period end Canadian to US dollar exchange

(1 CAD to USD)

0.7687

0.8017

0.7687

0.8017

Sodium Chlorate Sales Volume

(000's MT)

108

113

218

218

Chlor-alkali Sales Volume

(000's MECU)

51

56

96

107

Sales Revenue (2)

($000s)

135,952

142,632

280,485

282,289

Cash Operating Profit (1) (2)

($000s)

22,610

27,551

49,136

56,982

Maintenance Capital Expenditures (2)

($000s)

3,993

7,618

8,198

12,221

Notes:

(1)

Cash Operating Profit is a non-GAAP measure. See 'Non-GAAP Measures".

(2)

Excludes the results of discontinued operations.

Segmented Information for the Three Months Ended June 30, 2016 and 2015

Canexus has a total of six electrochemical manufacturing plants -- four in Canada and two at one site in Brazil -- organized into three business units. Below is our second quarter performance by segment.

North America

Three Months Ended June 30, 2016

Sodium Chlorate

Chlor- alkali

South America

Corporate

Total

Sales Revenue

Total Segment

66,633

45,360

24,032

-

136,025

Inter-Segment (1)

73

-

-

-

73

Total Sales Revenue from External Customers

66,560

45,360

24,032

135,952

Cost of Sales

39,241

28,110

19,280

164

86,795

Distribution, Selling and Marketing

Total Segment

9,749

18,021

132

495

28,397

Inter-Segment (1)

-

73

-

-

73

Total External Distribution, Selling and Marketing

9,749

17,948

132

495

28,324

General and Administrative

3,190

3,982

844

2,626

10,642

Operating Profit (Loss)

14,380

(4,680

)

3,776

(3,285

)

10,191

Add:

Depreciation and Amortization

3,547

4,521

3,386

169

11,623

Share-based Compensation Expense

-

-

-

796

796

Cash Operating Profit (Loss)

17,927

(159

)

7,162

(2,320

)

22,610

North America

Three Months Ended June 30, 2015

Sodium Chlorate

Chlor-alkali

South America

Corporate

Total

Sales Revenue

Total Segment

67,837

48,648

26,233

-

142,718

Inter-Segment (1)

86

-

-

-

86

Total Sales Revenue from External Customers

67,751

48,648

26,233

-

142,632

Cost of Sales

39,361

30,862

20,673

(850

)

90,046

Distribution, Selling and Marketing

Total Segment

9,996

18,277

137

424

28,834

Inter-Segment (1) (2)

-

461

-

-

461

Total External Distribution, Selling and Marketing

9,996

17,816

137

424

28,373

General and Administrative

2,849

3,556

1,044

1,349

8,798

Operating Profit (Loss)

15,545

(3,586

)

4,379

(923

)

15,415

Add (Deduct):

Depreciation and Amortization

3,535

4,836

3,056

212

11,639

Share-based Compensation Expense

-

-

-

497

497

Cash Operating Profit (Loss)

19,080

1,250

7,435

(214

)

27,551

Notes:

(1)

The North America Sodium Chlorate operating segment provides transloading services at market rates to the NACA operating segment for caustic soda transloaded from barges into trucks for delivery to NACA customers that are eliminated for financial reporting purposes.

(2)

NATO charged transloading fees (approximating market rates charged by third party terminals) to the NACA operating segment for HCl and caustic soda transloaded from railcars into trucks for delivery to NACA customers that are eliminated for financial reporting purposes.

Operating Results for the Three and Six Months Ended June 30, 2016 and 2015

Three Months Ended June 30

Six Months Ended June 30

CAD thousands

2016

2015

2016

2015

CONTINUING OPERATIONS

Sales Revenue

135,952

142,632

280,485

282,289

Cost of Sales (1)

86,795

90,046

176,090

175,438

Gross Profit

49,157

52,586

104,395

106,851

Distribution, Selling and Marketing

28,324

28,373

56,613

54,340

General and Administrative (2)

10,642

8,798

23,236

18,746

Operating Profit

10,191

15,415

24,546

33,765

Finance Expense

(9,003

)

(4,550

)

(6,007

)

(19,093

)

Other Income (Expense)

2,931

(53

)

4,447

(2,577

)

Income Before Income Taxes

4,119

10,812

22,986

12,095

Provision for (Recovery of) Income Taxes

161

(55,585

)

2,512

(54,258

)

Income from Continuing Operations

3,958

66,397

20,474

66,353

DISCONTINUED OPERATIONS

Loss from Discontinued Operations

-

(215,230

)

-

(221,118

)

Net Income (Loss)

3,958

(148,833

)

20,474

(154,765

)

Notes:

(1)

Depreciation and Amortization included for the three and six months ended June 30, 2016 - $11.4 million and $22.8 million, respectively (three and six months ended June 30, 2015 - $11.4 million and $22.7 million, respectively)

(2)

Depreciation and Amortization included for the three and six months ended June 30, 2016 - $0.2 million and $0.4 million, respectively (three and six months ended June 30, 2015 - $0.2 million and $0.4 million, respectively)

Conference Call

Canexus will hold a conference call on August 12, 2016 at 8:30 am MT (10:30 am ET) to discuss Canexus' second quarter 2016 financial results. A news release will be issued the evening before the call. Financial Statements and Management's Discussion and Analysis will be posted on the Canexus website at www.canexus.ca and filed on SEDAR.

The call will be hosted by Doug Wonnacott, President and Chief Executive Officer; Dean Beacon, Senior Vice President, Finance and Chief Financial Officer; Brian Bourgeois, Senior Vice President Sales and Marketing; and Ross Wonnick, Vice President, General Counsel and Corporate Secretary. Following the call there will be a question and answer session for analysts and institutional investors.

To access the call, please dial 1-416-340-2219 or 1-866-225-6564 outside Canada and US. A replay of the conference call will be available until end of day ET on August 19, 2016. To access the replay call 1-905-694-9451 or 1-800-408-3053 outside Canada and US, followed by passcode 6261155#.

About Canexus

Canexus produces sodium chlorate and chlor-alkali products largely for the pulp and paper and water treatment industries. Our four plants in Canada and two at one site in Brazil are reliable, low-cost, strategically located facilities that capitalize on competitive electricity costs and transportation infrastructure to minimize production and delivery costs. Canexus targets opportunities to maximize shareholder returns and delivers high-quality products to its customers and is committed to Responsible Care® through safe operating practices. Canexus' common shares (CUS) and debentures Series IV - CUS.DB.B; Series V - CUS.DB.C; Series VI - CUS.DB.D) trade on the Toronto Stock Exchange. More information about Canexus is available at www.canexus.ca.

Non-GAAP Measure

Cash Operating Profit (Loss) is a financial measure not determined in accordance with generally accepted accounting principles for publicly accountable enterprises in Canada ("GAAP"), but which management believes is useful in measuring the Corporation's performance. Readers are cautioned that this measure should not be construed as alternative to net income or loss or other comparable measures determined in accordance with GAAP as an indicator of the Corporation's performance or as a measure of the Corporation's liquidity and cash flow. The Corporation's method of calculating non-GAAP measures may differ from the methods used by other issuers and accordingly, the Corporation's non-GAAP measures are unlikely to be comparable to similarly titled measures used by other issuers. Readers should consult the Corporation's MD&A for the three and six months ended June 30, 2016 filed on SEDAR for a complete explanation of how the Corporation calculates each such non-GAAP measure.

Forward-Looking Statements

This news release contains forward-looking statements and information relating to expected future events and financial and operating results of the Corporation and its subsidiaries, including with respect to: expectations for improved operating performance and financial flexibility generally, the reliability of the Corporation's earnings expectations for chlor-alkali recovery, the strength and stability of the business fundamentals and the performance of the Corporation's North American sodium chlorate and Brazil business units, the ability to improve efficiency and maximize margins, expectations for the size and timing of cash operating improvements and the compound annual growth rate thereof, the Corporation's ability to reduce its bank indebtedness and the timing and quantum thereof, expectations regarding the terms of and the Corporation's entrance into the Facility and the Bridge Loan and its impact on Canexus' liquidity, expectations for the Corporation's rebuilt compressor at North Vancouver and its impact on plant production capabilities, the Corporation's ability to lower its senior debt to earnings ratio, the Corporation's expectations for free cash flow, the quantum of maintenance capital expenditures, and the Corporation's ability to manage such expenditures over the next three years, expectations regarding the sufficiency of net cash from operating activities to meet ordinary course obligations and commitments, and the outcome of litigation with Superior. The use of the words "expects", "anticipates", "continue", "estimates", "projects", "should", "believe", "plans", "intends", "may", "will" or similar expressions are intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements for a variety of reasons, including market and general economic conditions, future costs, treatment under governmental regulatory, tax and environmental regimes and the other risks and uncertainties detailed under "Risk Factors" in the Corporation's Annual Information Form filed on the Corporation's SEDAR profile at www.sedar.com. Management believes the expectations reflected in these forward-looking statements are currently reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon. Due to the potential impact of these factors, the Corporation disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. Any financial outlook information contained in this news release about prospective results of operations, financial position or cash flows is based on assumptions about future events including economic conditions and proposed courses of action, based on Management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this news release should not be used for purposes other than for those for which it is disclosed herein.